MS&AD Insurance Group Holdings, Inc. (8725) Earnings Call Transcript & Summary

Hello, everyone. I'm Noriyuki Hara, President of MS&AD Holdings. Thank you for taking the time to watch this presentation video of the first information meeting in fiscal year 2024. I would like to take this opportunity to speak, for approximately 20 minutes, on the topic of business transformation for sustainable corporate value expansion. Now let us begin the presentation. Today's presentation will consist of 3 parts: firstly, sales of strategic equity holdings and efficient use of capital for growth; secondly, review of fiscal year 2023 results and Stage 1 of the medium-term management plan; and finally, initiatives to enhance corporate value in Stage 2 of the medium-term management plan. In this segment, I would like to outline the business improvement plan formulated by 2 of our group companies, Mitsui Sumitomo Insurance and Aioi Nissay Dowa Insurance. We sincerely apologize once again to our customers and stakeholders for the inconveniences and concern caused by our actions related to price fixing and fraudulent insurance claims. Both companies will revisit our management philosophy, management vision and action guidelines and transform into companies committed to serving the best interests of our customers. One of the key elements of the improvement plan is the creation of a conducive competitive environment. In addition to divesting our strategic equity holdings to 0 over the next 6 years, we will also reassess our standards for supporting our clients' core businesses as well as criteria for secondment to client companies. Furthermore, we will revise our approach to sales budgets and evaluation standards; enhance our insurance underwriting operations across the group; and make changes to ensure that our customers choose us based on enhancing the inherent value of insurance. The holding company will reinforce its management system and oversee the business improvement process of both companies. Regarding our strategic equity holdings, we will seek early approval from the issuer client companies to sell these holdings with the goal of reducing the outstanding balance to 0 by the end of fiscal year 2029. However, we will consider transferring a portion of these shares for which the client companies have granted approval for sale to net investments as part of our efforts to optimize our asset management portfolio. We will provide updates on the progress of these reductions at future IR meetings as necessary. Next, I will present a visual representation outlining the allocation of funds obtained from the sale of strategic equity holdings. Of JPY 3.6 trillion expected from the sale of strategically held equities, approximately JPY 2.1 trillion will be allocated to investments for future growth. These include business investments targeting North America and Asia; allocation to higher-return assets, such as foreign bonds and alternative assets; investments in next-generation systems and DX; among others. In addition, 50% of the profit of sales of strategic equity holdings will be returned to our shareholders. Our shareholder return policy remains unchanged, that is 50% of the group's adjusted profit will be returned as dividends or share buybacks. However, with the effect from the next fiscal year, gains resulting from the accelerated sales of strategically held equities exceeding those already factored into our plan will be returned to our shareholders as special dividends. Next, I'll proceed to the second part of today's presentation: review of fiscal year 2023 results and Stage 1 of the medium-term management plan. Consolidated net premiums written for non-life insurance increased by 8.4% year-on-year reaching JPY 4,261.7 billion. This growth was mainly driven by our overseas subsidiaries. In Stage 1, the first 2 years of our medium-term management plan, the net premium increased by JPY 652.7 billion. The group's adjusted profit increased by JPY 157.7 billion from the previous fiscal year to JPY 379.9 billion, a record-high level and compared to fiscal year 2021 increased by JPY 77.4 billion, excluding special factors. The group's adjusted ROE rose by 2.9 percentage points to 9%. However, we did not reach the target of 10%, mainly due to the increase in our net assets. As ESR was nearing the upper end of its target range, it is adjusted to 229% after factoring in capital level adjustment. Regarding the review of Stage 1, on the qualitative front, we have enacted 3 key strategies: value; transformation; and synergy, alongside four key initiatives: sustainability; quality; human resources; and ERM. With regard to transformation, MS Amlin's profit has recovered and we have worked to build up the balance of higher-return assets. For synergy, we advanced the One Platform strategy and synergy initiatives, both in Japan and overseas. On the other hand, in terms of value, the balance of the domestic non-life insurance business has declined, causing challenge to intensify our efforts to improve profitability in voluntary automobile insurance and fire insurance. In our key initiatives, we continue to lead the industry in sustainability through efforts such as disclosing greenhouse gas reduction targets and publishing reports on TCFD and TNFD. Conversely, in response to our group company's involvement in price fixing and fraudulent insurance claims, we are working to reinforce our customer-focused business principles. In fiscal 2023, the annual shareholder return will be JPY 270, an increase of JPY 70 from the previous fiscal year, and an increase of JPY 30 from the forecast, including JPY 150 for year-end dividend. As basic return to shareholders, we will buy back our own shares up to the maximum amount of JPY 50 billion, of which JPY 10 billion was already carried out in fiscal 2023. In addition, an additional return of maximum JPY 150 billion will be provided for the purpose of capital level adjustment. The dividend forecast for fiscal 2024 is JPY 145 per year after 3 for 1 stock splits, comprising JPY 100 as the ordinary dividend and JPY 45 as the special dividend resulting from the accelerated sale of strategic equity holdings. We will continue to enhance shareholder returns by increasing profits in the current fiscal year and beyond. In this final section, I will outline our efforts to enhance corporate value in the second stage of our medium-term management plan. The group's adjusted profit is expected to expand significantly reaching JPY 630 billion in fiscal 2024 and JPY 760 billion in fiscal 2025, largely due to the accelerated sale of strategically held equities. And the transition to IFRS 9 and 17 is scheduled for the end of fiscal 2025. With regard to the domestic non-life insurance business, we will implement fundamental reforms in the second stage in response to our past involvement in price fixing and fraudulent claims. Specifically, we will continue to enhance the business structure transformation and the productivity and profitability transformation that were embarked on in the first stage. At the same time, we will also vigorously transform the value we deliver to achieve the goals outlined in the medium-term management plan and position our company as one that offers the most valuable products and services to both customers and society at large. The holding company will strengthen the capabilities of its management committees by establishing a new Risk Management Committee tasked with identifying and addressing risks impacting our group. In addition, we will implement a mechanism to ensure that significant management issues are promptly and appropriately reported from the operating companies to the holding company. Furthermore, regarding the 3-line model for internal control, we will strengthen the functions of the second line, the administrative division; and the third line, the internal audit division to enhance the governance structure of the group. Next, I would like to outline our efforts in consideration of capital cost and stock price. Our group recognizes capital costs approximately 7% based on CAPM and strives to maintain a stable adjusted ROE of at least 10% to ensure sustainable growth in both corporate and shareholder value. To increase the equity spread, which is the difference between ROE and capital cost, we have divided our efforts into ROE improvement and capital cost reduction. To improve ROE, we will accelerate the liquidation of unprofitable businesses and also accelerate the realignment of our business portfolio into areas with higher returns. Our Brazilian subsidiary effectively withdrew from the retail market by shifting individual market, which had a problematic profitability to a coinsurance with a major local insurance company. We stopped local businesses in Guam where typhoons caused losses in the previous fiscal year and Hawaii, which was affected by large-scale wildfires. We also withdrew from BIG in the United Kingdom and Hippo in the United States where we had invested and sold nursing care business in Japan. We will continue to study capital reallocation with discipline, including investment effectiveness and improvement of capital efficiency. We will also improve ROE by improving profitability in our existing businesses and maintaining net assets at an appropriate level through shareholder returns aimed at capital levels. For capital cost reductions, we worked to reduce the risk of natural catastrophes, mainly overseas and interest rate risk in the life insurance business in the first stage of medium-term management plan. We will accelerate the sale of strategic equity holdings. With regard to natural catastrophe risk, we will appropriately control the level of domestic windstorm and flood risk and strengthen our response to secondary perils. Next, I'll discuss initiatives within each business domain. First, I will explain our efforts to improve the profitability of voluntary automobile insurance within our domestic non-life insurance operations. In voluntary automobile insurance, the trend of increasing accident frequency, following the reopening of the economy after COVID, persisted until the second half of fiscal 2023. Combined with the increase in the average payout per claim, the outlook for underwriting profit remains quite challenging. In January 2024, we raised the rate by approximately 3%. We will closely monitor the earnings trend for this fiscal year and consider further rate increase, if necessary. Furthermore, we will promote prudent underwriting and payout practices, increase the sales of telematics and driving recorder-based automobile insurance proven to reduce accident rates and implement measures to address secondary perils, such as hailstorms. Regarding fire insurance, we are steadily progressing in our efforts to enhance profitability. This includes the review of products and rates as well as the implementation of measures to address major losses. We expect to reach profitability in fiscal 2026. In previous premium rate revisions, we have shortened insurance periods. This has led to a decrease in the policies with a negative rate of return as indicated in the graph on the right. This fiscal year, we expect the proportion of policies with a positive return to exceed 50%. We will continue to promote disaster prevention and mitigation, conduct risk surveys and address secondary perils. As a result of implementing the One Platform strategy, the expense ratio has been consistently declining despite the effect of wage increases and inflation. The One Platform strategy expands the areas to be consolidated in stages to improve the efficiency and sophistication of operations. In addition, we will further reduce costs by transforming business processes and reducing system assets. Furthermore, as part of a significant shift in our business approach, we will conduct a thorough review of the business processes. We will streamline routine operations and allocate the time saved towards enhancing our ability to deliver value to our customers. These initiatives will transform agent operations from traditional contract processes to a model centered around value delivery. MSA Life aims to expand the cross-selling of life and non-life insurance by leveraging the largest network and customer base of non-life agents in Japan. Additionally, it will develop and cultivate the corporate employee market by utilizing MSA Care, a service that provides value both before and after compensation and coverage. MSA Life steadily expands the investment asset, such as higher return assets. In order to stabilize profits in the future, MSA Life rebalances a part of its bond holdings and book the loss on the sale of bonds. MSP Life leverages its strengths in product development and sales channels, particularly in bancassurance. In addition, the company plans to grow by targeting the asset-building market, through strengthening sales of level premium products and expansion of asset-building products, to create synergy with MSA Life. It will also strive for sustainable growth and consistent profit contributions to the group while mitigating profit volatility through product and investment diversification and reinforcing ERM initiatives. In the first stage, our international business achieved notable advancements in profitability, particularly within Lloyd's and Reinsurance businesses, while also restructuring unprofitable businesses. Our overseas operations have significantly contributed to diversifying our group's revenue sources and spreading risks, and we will continue to expand these businesses, both organically and inorganically, particularly in North America and Asia. Among Lloyd's Reinsurance businesses, AUL has made significant progress in improving its underwriting portfolio. The company has now entered a phase of expanding its underwriting, focusing on more profitable and less volatile product lines. We will continue to conduct disciplined underwriting and aim to become one of the top-level syndicates in the Lloyd's market. Within Lloyd's and Reinsurance business, MS Re is expected to maintain control over natural catastrophe risk and contribute to a high and stable level of profit through comprehensive cycle management. Last month, MS Re received an A+ rating from both AM Best and Standard & Poor's. The company intends to raise the profile of the MS Re brand and expand transactions with leading direct insurers. In Asia, we will focus on retail markets with significant growth potential, with the strength of our business base covering ASEAN, India and China. In addition to bancassurance, leveraging our relationships with existing partners, we will expand our business by adapting in a timely manner to social and consumer changes, such as expanding insurance sales through partnerships with platform holders. We will also actively consider business alliances and business investment opportunities to realize profits as soon as possible. Finally, I would like to explain our investment strategy. In the first stage, our focus was on accumulating higher-return assets, such as foreign bonds and alternative investments while maintaining ALM and liquidity. In the second stage, as we take the significant step of divesting our strategic equity holdings to 0, we will conduct a comprehensive review of the asset allocation across the group ensuring alignment with economic outlook and market conditions. Currently, we are in the process of analyzing the optimal asset structure for domestic-listed equities, foreign corporate bonds, alternatives and other assets. As part of the promotion of investment strategy, we will also improve our structural framework. We will strengthen the skills necessary for managing domestic-listed stocks, foreign corporate bonds and private assets held as net investments through the promotion of human asset development, staff recruitment from outside and business alliances. In addition, group companies will utilize MSR, a New York-based company established as a joint venture with LGT in Switzerland as well as developing systems to utilize resources inside and outside the group and manage risks. This concludes my presentation, and thank you for your continued understanding and unwavering support. [Statements in English on this transcript were spoken by an interpreter present on the live call.]